Factor ETFs give investors a simple way to focus on a specific part of the stock market. Instead of buying the entire market, these ETFs select stocks based on certain traits. These traits can include strong recent performance, solid financial health or lower price swings.
Three factors often get attention after a difficult market year: momentum, quality and low volatility. Each follows a different idea. Momentum focuses on stocks with strong recent returns. Quality focuses on companies with strong profits, healthy balance sheets and stable businesses. Low volatility focuses on stocks that tend to move less than the wider market.
The key question is not just which factor did well during the last period of market stress. The bigger question is what type of market may come next.
Recent data shows why this matters. In US equities, no single factor ETF has been the top performer every year. Factor leadership can change quite quickly as market conditions change.
What Happened During 2025?
The year 2025 gave investors a useful example of this factor rotation.
Nasdaq Dorsey Wright data shows that buyback stocks had a strong 2025, with a 17.91% gain. They were the only factor in its US factor group to beat the benchmark for the full year. Momentum cooled after two top-three finishes and still ended 2025 with an 8.37% gain. Low volatility and dividend strategies sat near the bottom of the group.
The story was not the same throughout the year.
In the first quarter of 2025, quality and momentum were among the weakest factors after both had been among the strongest in 2024. Low volatility and yield led the group during that period of market stress.
By the fourth quarter, momentum again faced pressure. Morningstar reported that momentum was the weakest global factor for that quarter, while value led.
This sharp change shows how quickly factor leadership can turn when market conditions change.
Momentum: Strong When the Trend Stays Strong
Momentum ETFs select stocks that have shown strong recent price performance. The basic idea is simple: stocks that have done well may continue to do well for some time.
This can work very well when a clear market trend remains in place. It can also create problems when that trend suddenly breaks.
The risk became clear in early 2025. Momentum had a large exposure to areas that had led the market in 2023 and 2024. When those areas came under pressure, the momentum factor also faced a difficult period.
Momentum should not, however, be viewed as a permanently weak factor. Data from the first half of 2026 showed that growth and momentum had moved back near the top of the US factor group.
This is the main point with momentum: its results depend heavily on whether the market trend continues.
Quality: A Focus on Strong Businesses
Quality takes a different route.
A quality ETF usually looks for companies with strong profitability, sound balance sheets and stable earnings. Instead of asking which stocks have risen the most, this factor asks which businesses have stronger financial characteristics.
That can make quality useful when investors want exposure to companies with greater financial strength.
MSCI studied quality performance across different growth and interest-rate environments. Its research found that quality indexes had their strongest relative results when economic growth and yields both declined. Over the past 25 years, quality indexes also outperformed the broader market, with the largest advantage in periods of slower growth and lower yields.
Quality did not always provide protection during the 2025 volatility. Morningstar found that quality had a difficult first quarter, even though many investors may expect quality stocks to hold up better during market stress.
Morningstar also noted that its quality indexes had a similar level of risk to their parent benchmarks.
That is an important detail. A quality ETF is not the same as a low-volatility ETF. A company can have excellent profits and a strong balance sheet while its stock price still moves sharply.
Low Volatility: The Defensive Choice
Low-volatility ETFs take a more direct approach to risk.
They usually select stocks with lower historical price volatility. The aim is not necessarily to find the fastest-growing companies. Instead, the goal is to reduce the size of market swings while keeping exposure to stocks.
This approach can become useful when investors remain concerned about large market declines.
MSCI found that minimum-volatility indexes outperformed their broader parent indexes during the sharp rise in volatility after the April 2025 tariff shock. The same pattern appeared across developed and emerging markets during the first two weeks of April.
But lower risk can also mean lower upside during a strong bull market.
The 2025 US data from Nasdaq Dorsey Wright shows this trade-off clearly. Low volatility ended the year near the bottom of the factor group while the broader market remained strong.
So low volatility can help when capital protection matters more, but it can lag when investors move back toward higher-risk stocks.
Which Factor Fits Which Market?
The three factors respond to different conditions.
Momentum can make sense when a strong market trend has room to continue. If market leadership remains with stocks that have strong recent returns, momentum can benefit.
Quality can become more relevant when investors care about business strength, steady profits and financial resilience. MSCI’s research suggests that quality has historically done particularly well when growth slows and yields fall.
Low volatility can become more relevant when uncertainty and drawdown risk are the main concerns. Its past performance during high-volatility periods supports its role as a defensive equity factor.
None of this means that one factor will always work in a particular environment. Markets can change faster than expected.
The Case for Combining Factors
One reason investors may avoid a single-factor bet is simple: factor leadership changes.
State Street’s factor research makes the same point. No single factor has consistently outperformed from one year to the next. The firm notes that a mix of value, quality and low volatility can help reduce the effect of factor cycles.
A combined approach can therefore make sense for an investor who does not want to make a large bet on one market condition.
Momentum can provide exposure to strong trends. Quality can add a focus on profitable businesses. Low volatility can reduce exposure to large price swings.
The result is not guaranteed to beat the market, but it can reduce dependence on one factor.
The Bigger Lesson for Investors
The main lesson from the recent data is that factor investing requires patience.
Momentum had strong periods, then cooled. Low volatility helped during the early 2025 volatility shock, then ended the year near the bottom of the US factor group. Quality faced pressure during the first quarter but has historical strengths during slower-growth and lower-yield periods.
That makes factor selection less about finding the factor that just performed best and more about understanding why a factor may work.
For an investor who expects strong trends to continue, momentum deserves attention. For someone who values company fundamentals and wants exposure to financially stronger businesses, quality may fit better. For someone who places greater importance on downside control, low volatility may have a stronger role.
The important part is to match the factor with the purpose of the portfolio. Past returns can show what happened, but they cannot tell investors with certainty what will happen next
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